NEW YORK, Aug 5 (Reuters) – A rally in U.S. stocks that continued despite Wall St skepticism faces a reality in the week ahead as key inflation data threatens to close the door expectations of an accommodating change from the federal government. Reserve. Read more
The S&P 500 (.SPX) has walked a tightrope this summer, up 13% from its mid-June lows on hopes the Fed will end its rate hikes sooner than expected that crush the market. A blistering U.S. jobs number on Friday bolstered the case for further Fed hikes, but barely rattled stocks – the S&P fell less than 0.2% on the day and achieved its third straight week of gains. Read more
More upside could hinge on whether investors believe the Fed is succeeding in its fight against soaring consumer prices. Signs that inflation remains strong despite a recent decline in commodity prices and a tightening of monetary policy could further weigh on expectations that the central bank will be able to stop raising rates early in the year. next year, drying up risk appetite and pushing equities further down.
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“We are at the point where consumer price data has reached a level of importance for the Super Bowl,” said Michael Antonelli, managing director and market strategist at Baird. “That gives us an indication of what we and the Fed are up against.”
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Investors’ gloomy outlook was underscored by recent data from BofA Global Research, which showed that the average allocation to equities recommended by U.S. sell-side strategists slipped to its lowest level in more than five years in July, even as the S&P 500 rose 9.1% that month. for its biggest win since November 2020.
Institutional investors’ exposure to equities also remained low. The equity positioning of discretionary and systematic investors has remained in the 12th percentile of its range since January 2010, according to Deutsche Bank’s release last week.
For their part, Fed officials last week took issue with the narrative of a so-called dovish pivot, with one – San Francisco Fed President Mary Daly – saying she was “intrigued by bond market prices that reflected investor expectations for the central bank to begin cutting rates in the first half of next year. Read more
U.S. rate futures priced a 69% chance of a 75 basis point hike at its September meeting, up from around 41% before the payrolls data. Futures traders also priced in a 3.57% federal funds rate by the end of the year.
Positioning in options markets, meanwhile, shows little evidence that investors are rushing to chase further stock market gains.
The one-month average daily trading volume of U.S.-listed call options, typically used to place bullish bets, is down 3% from June 16, according to data from Trade Alert.
“We are surprised that investors are not starting to chase upside calls for fear of underperforming the market,” said Matthew Tym, head of equity derivatives trading at Cantor Fitzgerald. “People just watch.”
Celia Rodgers Hoopes, portfolio manager at Brandywine Global, believes much of the recent rally has been fueled by short hedging, especially among many high-flying tech names that haven’t performed well this year.
“The market doesn’t want to miss the next rally,” she said. “It’s hard to say whether it’s sustainable or not.”
Of course, investors are not uniformly bearish. Corporate earnings came out stronger than expected for the second quarter, with some 77.5% of S&P 500 companies beating earnings estimates, according to I/B/E/S data from Refinitiv, fueling some of the gains in the market.
Baird’s Antonelli also said a weaker-than-expected inflation figure next week could push more investors back to equities.
“Is there a scenario right now where inflation is going down and the Fed isn’t going to stage a hard landing? There could be, and no one is positioned for that.
Others, however, are more skeptical.
Tom Siomades, chief investment officer of AE Wealth Management, believes the market has yet to bottom and urged investors to avoid chasing stocks.
“The market seems to be engaging in wishful thinking,” he said. Investors “ignore the old adage, ‘don’t fight the Fed.'”
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Reporting by Saqib Iqbal Ahmed; Writing and additional reporting by Ira Iosebashvili; Editing by Ira Iosebashvili and Josie Kao
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